Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

7. INCOME TAXES

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are summarized below.

(in thousands)	2021			2020
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses	$	22,637		$	21,096
Unearned premium offset		23,080			19,862
Deferred compensation		3,469			2,829
Stock option expense		3,089			2,749
Lease liability		3,796			3,971
Other		367			389
Deferred tax assets before allowance	$	56,438		$	50,896
Less valuation allowance		—			—
Total deferred tax assets	$	56,438		$	50,896
Deferred tax liabilities:
Net unrealized appreciation of securities	$	76,533		$	77,639
Deferred policy acquisition costs		21,746			18,569
Lease asset		3,101			3,402
Discounting of unpaid losses and settlement expenses - Tax Cuts and Jobs Act (TCJA) implementation offset		2,545			3,181
Fixed assets		3,518			3,439
Intangible assets		1,537			1,558
Undistributed earnings of unconsolidated investees		29,515			21,813
Other		1,452			1,530
Total deferred tax liabilities	$	139,947		$	131,131
Net deferred tax liability	$	(83,509	)	$	(80,235	)

Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2021, 2020 and 2019, differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income from continuing operations as demonstrated in the following table:

(in thousands)	2021						2020						2019
Provision for income taxes at the statutory federal tax rates	$	72,307		21.0		%	$	39,867		21.0		%	$	48,874		21.0		%
Increase (reduction) in taxes resulting from:
Excess tax benefit on share-based compensation		(3,090	)	(0.9	)	%		(3,537	)	(1.8	)	%		(3,958	)	(1.7	)	%
Tax-exempt interest income		(1,219	)	(0.3	)	%		(1,293	)	(0.7	)	%		(1,238	)	(0.5	)	%
Dividends received deduction		(891	)	(0.3	)	%		(883	)	(0.5	)	%		(823	)	(0.4	)	%
Investment tax credit		(3,491	)	(1.0	)	%		(2,435	)	(1.3	)	%		—		—		%
ESOP dividends paid deduction		(1,566	)	(0.5	)	%		(1,083	)	(0.6	)	%		(1,122	)	(0.5	)	%
Unconsolidated investee dividends		—		—		%		(479	)	(0.2	)	%		(1,802	)	(0.8	)	%
Nondeductible expenses		3,834		1.1		%		1,878		1.0		%		1,649		0.7		%
Other items, net		(917	)	(0.2	)	%		715		0.4		%		(488	)	(0.1	)	%
Total	$	64,967		18.9		%	$	32,750		17.3		%	$	41,092		17.7		%

Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher in 2021 due to higher levels of pretax income, which decreased the impact of tax-favored adjustments on a percentage basis.

Our net earnings include equity in earnings of unconsolidated investees, Maui Jim and Prime. The investees do not have a policy or pattern of paying dividends. As a result, we record a deferred tax liability on the earnings at the corporate capital gains rate of 21 percent in anticipation of recovering our investments through means other than through the receipt of dividends, such as a sale. We received a $4.7 million dividend from Prime in 2020 and recognized a $0.5 million tax benefit from applying the lower tax rate applicable to affiliated dividends paid to insurance companies (10.8 percent in 2020), as compared to the corporate capital gains rate on which the deferred tax liabilities were based. In 2019, we received a $13.2 million dividend from Maui Jim and recognized a $1.8 million tax benefit from applying the lower tax rate applicable to affiliated dividends paid to non-insurance companies (7.4 percent in 2019), as compared to the corporate capital gains rate on which the deferred tax liabilities were based. Standing alone, the dividends resulted in a 0.2 percent and 0.8 percent reduction to the 2020 and 2019 effective tax rates, respectively. No dividends were declared from unconsolidated investees in 2021, therefore having no impact to the 2021 effective tax rate.

Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in 2021, 2020 and 2019 resulted in tax benefits of $1.6 million, $1.1 million and $1.1 million, respectively. These tax benefits reduced the effective tax rate for 2021, 2020 and 2019 by 0.5 percent, 0.6 percent and 0.5 percent and, respectively.

We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 21 percent. We believe it is more likely than not that all deferred tax assets will be recovered, given the carry back availability as well as the results of future operations, which will generate sufficient taxable income to realize the deferred tax asset. In addition, we believe when these deferred items reverse in future years, our taxable income will be taxed at an effective rate of 21 percent.

Federal and state income taxes paid in 2021, 2020 and 2019 amounted to $38.6 million, $23.7 million and $25.6 million, respectively.

Although we are not currently under audit by the IRS, tax years 2018 through 2021 remain open and are subject to examination.